Lehman Brothers – Down the Slippery Slope

We are at the one year anniversary Lehman Brothers’ failure.  Many have blamed the government’s unwillingness to bail Lehman out for the subsequent financial crisis that struck during that same month.  The facts point to a different story.

Lehman Brothers failed on September 15, 2008.  Let us look at other” happenings” during that month:

• September 7 – The government took over Fannie Mae and Freddie Mac.
• September 16 – AIG was bailed out by the government with an $85 billion loan.
• September 25 – Washington Mutual, one of America’s 10 largest banks, was seized by the FDIC.
• September 29 – Wachovia, another top 10 bank, was sold to avoid failure.
• September 23 & 24 – Paulson and Bernanke did gave their TARP speeches to Congress

Professors John Cochrane and Luigi Zingales of the University of Chicago have developed a chart that helps explain the panic that led to the financial meltdown.  Their chart shows spreads of the bank credit default swaps (CDS) and LIBOR-OIS to graph the perceived risk of short-term interbank lending, a key ingredient to the liquidity crises.  As indicated, the panic spreads did not begin until approximately one week after Lehman declared bankruptcy.  About that time, the government (Paulson and Bernanke) went to Congress asking for the $700 billion TARP fund.  Their “sky is falling” mentality panicked the entire world into believing that without this huge injection of funds that the entire financial system would collapse.  This call for crisis created during the Bush Administration made a very troubled financial situation even worse.

Many argue that TARP helped avoid financial Armageddon.  Others that are more cynical believe that the government used the crisis to grab power.  I lean towards this latter explanation.  Since TARP we have gone down a slippery slope that required one bailout after bail another.  This included the bailout of GM and the Stimulus Package with an astronomical cost.  Trillions of dollars of debt have been placed on the US government’s balance sheet.  Those that believe there will not be severe consequences to this irresponsible spending are drinking from the Kool-Aid.

It is unlikely that we are finished with the bailouts.  We are too far down the slippery slope to say “no” to the next troubled industry or part of the population.  This even though the fixes ain’t working.  What did Albert Einstein say about insanity?  “The definition of insanity is doing the same thing over and over again and expecting different results.”  It doesn’t take a genius to realize where we are headed.